Precious Metals vs. Stocks and Bonds

Framing the Question Correctly

The debate over precious metals versus stocks and bonds often frames them as competing choices — as if you must pick one and reject the others. This is a false choice. The more useful question is: what does each asset class do well, when does each perform best, and how do they interact within a diversified portfolio?

Gold and silver are not equity investments. They are not designed to compound capital the way business ownership does. They are fundamentally different assets with different risk-return profiles, different drivers, and — critically — different correlations with stocks and bonds. Understanding these differences is the starting point for thoughtful portfolio construction.

Long-Term Returns: Setting Realistic Expectations

Over very long time horizons — decades or centuries — gold's primary function has been to preserve purchasing power, not to grow real wealth. This is a meaningful and valuable function, but investors should not expect gold to match equities' long-run real return.

Equities

The S&P 500 has delivered annualized total returns (including dividends) of approximately 10%–11% nominally and 7%–8% in real (inflation-adjusted) terms over the past century. This reflects the power of compound earnings growth from productive businesses — something gold, which produces no earnings, fundamentally cannot replicate.

Bonds

Investment-grade bonds have historically delivered lower nominal returns than equities — roughly 4%–6% annually over the past century — but with significantly lower volatility. In recent decades of falling interest rates (1980–2020), bond returns were unusually strong. The future return on bonds depends heavily on the interest rate environment.

Gold

Gold's long-run nominal return since the end of the Bretton Woods system in 1971 has been significant — roughly 8%–9% annualized from 1971 to the early 2020s. However, much of that return reflects the repricing of gold from its artificially suppressed $35/oz peg. Over shorter periods, gold's returns are highly variable and cycle-dependent. There are 10–20 year stretches where gold dramatically outperforms equities, and others where equities dramatically outperform gold.

Volatility: Gold vs. Stocks vs. Bonds

Gold's price volatility is often compared to that of equities. In practice, gold's annualized daily volatility is similar to or slightly lower than the S&P 500 — roughly 15%–20% in recent years. However, the nature of that volatility is different from equities in an important way: gold's volatility does not typically correlate with equity volatility in the same direction.

When stocks are having their worst drawdowns — 2000–2002, 2007–2009, March 2020 — gold either falls far less than stocks or actually rises. This asymmetry in crisis performance is what makes gold valuable as a portfolio component even if its isolated volatility looks similar to stocks.

Bonds, traditionally considered the low-volatility, defensive component of portfolios, have their own risks that the 2022 environment exposed dramatically. When inflation surges, bonds can suffer serious real losses simultaneously with stocks — the classic 60/40 portfolio's worst nightmare. In 2022, both the S&P 500 and long-duration US Treasury bonds fell more than 20%, while gold remained relatively flat. This demonstrated that bonds do not always provide the crisis protection investors expect.

Correlation: The Core Case for Precious Metals Allocation

The most powerful argument for holding precious metals alongside stocks and bonds is not their isolated return profile — it is their low or negative correlation with those assets in crisis environments.

Correlation measures how two assets move together on a scale of −1 (perfect inverse) to +1 (perfect positive). A correlation of 0 means the assets move independently. Modern portfolio theory shows that adding a low-correlation asset to a portfolio can reduce overall volatility without necessarily sacrificing expected returns — what investors call the "diversification benefit."

Gold-Equity Correlation

The long-run correlation between gold and US equities is near zero or slightly negative. In normal bull market environments, the correlation can drift positive (both rising with confidence and growth). But in crisis environments — the periods when correlation matters most for investors — gold's correlation with stocks tends to sharply decrease or go negative. This means gold tends to hold value or rise precisely when stock portfolios are suffering their worst drawdowns.

Gold-Bond Correlation

Gold's correlation with nominal US Treasury bonds has historically been slightly negative, but this relationship is nuanced. In deflationary shocks (like 2008), both gold and Treasuries can rise simultaneously as safe havens. In inflationary environments (like 2022), gold can hold value while Treasuries lose significantly in real terms, making gold a superior inflation hedge compared to nominal bonds.

Head-to-Head: Major Market Cycles

1980–2000: Equity Decade, Gold Bear Market

The 1980s and 1990s were exceptional decades for US equities, driven by falling interest rates, tech innovation, and strong corporate earnings growth. Gold suffered one of its worst secular bear markets, falling from $800 in 1980 to $252 in 1999. Investors fully allocated to equities outperformed over this period. Gold's poor relative performance during this era is often cited as evidence against holding it — but cherry-picking a bear market for any asset class tells an incomplete story.

2000–2011: Gold Decade, Equity Stagnation

The subsequent decade reversed the picture dramatically. The dot-com bust and 2008 financial crisis produced two devastating stock market crashes. US equities delivered approximately zero real return over the 2000–2010 decade — a "lost decade" for stocks. Gold, meanwhile, rose from $252 in 1999 to $1,900 in 2011 — a 654% gain. Investors who dismissed gold after its 1980s bear market missed its greatest modern bull market.

2011–2020: Mixed Decade

The following decade saw equities reclaim leadership as the Federal Reserve's zero-rate policy supercharged corporate valuations. Gold fell from $1,900 to around $1,050 by 2015 before recovering. An investor holding a blended portfolio of stocks and gold still fared well, as equity gains more than compensated for gold's decline while gold's 2020 recovery cushioned the COVID crash.

2020–2024: Both Rising Together

The most recent period saw an unusual scenario where both equities and gold reached record highs. Post-COVID monetary stimulus, then persistent inflation, then AI-driven equity enthusiasm combined with central bank gold buying and geopolitical risk to support both asset classes simultaneously — a reminder that the relationship between asset classes is never fixed.

Silver vs. Stocks: Higher Risk, Potential Higher Reward

Silver is more volatile than gold and has a higher correlation with industrial commodities and economic growth. In equity bull markets, silver can significantly underperform gold. In commodity supercycles and economic recoveries, silver can dramatically outperform both gold and equities. Silver's dual nature — monetary metal and industrial commodity — makes it a higher-risk, potentially higher-reward precious metals position.

The Portfolio Allocation Question

Given this picture, what is the right allocation to precious metals? Most financial research suggests that an allocation in the 5%–15% range provides meaningful diversification benefits while limiting the drag that gold can create in sustained equity bull markets.

• Conservative investors: 10%–15% in gold, heavier weighting toward physical metal or a gold IRA for maximum defensive positioning
• Moderate investors: 5%–10% in gold, mix of physical and ETF depending on preference
• Growth-focused investors: 5% minimum as insurance, possibly including some silver for additional upside

The key insight from portfolio research is that even a small gold allocation — as little as 5% — can meaningfully improve a portfolio's risk-adjusted return (Sharpe ratio) over full market cycles that include both bull markets and significant corrections. Read our full guide on how much gold to own for a more detailed analysis of allocation sizing.